Killer Arguments Against LVT, Not (463)

Sorry to return to the ASI dirge of two years ago, but I saw this excerpt trotted out elsewhere as the inevitable 'but...' in an otherwise fairly favourable article:

One false claim made in favour of the LVT is that it would force the land to be used ‘more productively’. But there is already a sort of ‘tax’ on owning land and not using it as productively as possible: opportunity cost.

If you choose to use your land as a garden instead of a block of flats to rent out, you are ‘paying’ the cost of doing so in the rent you’re forgoing [sic].

LVT and planning is indeed a bit of a red herring. The main benefits are the social and economic benefits of using it to replace taxes on output and employment.

He misses the point by yapping on about people selling their back gardens for housing (how many people have a back garden big enough? One in a thousand? How many of those would bother applying for planning? How many councils would grant it?) The additional value of a back garden beyond a certain size is minimal, so the LVT on a home with a big back garden would be barely more than the LVT on the house next door with a normal back garden; nothing happens.

But there is clearly a big difference between actual cash costs and opportunity costs. Consider two examples:

1. Poor Widows In Mansions

Our first Poor Widow owns and lives in a large/expensive home. She could rent this out, bank £20,000 a year rent and rent herself somewhere for £5,000 a year. I'm sure that some Poor Widows do this, but most of them don't. Her heirs aren't too bothered either, because if they kept nudging her to do this, she might get sick of them and cut them out of her will.

Our second Poor Widow rents the large/expensive home next door for £20,000 a year. Oh no, she doesn't, she traded down to renting somewhere for £5,000 a year decades ago when her husband died/she retired.

They are both getting the same benefits from living at that location (nice neighbourhood, near the shops, good GP, whatever); one has a notional cost and the other a real cost.

So with a real cash cost, housing is being used more efficiently, the larger/wealthier family is living in the large/expensive home and she is living in the smaller, affordable one.

2. Land speculators

Our first land speculator inherited some fields at the edge of a growing town years ago, mortgage free. He knows that its value is increasing by 5% or 10% a year compound (or, the chances of getting planning gradually approaches 100%). He can only earn 1% interest by selling up and putting the cash in the bank. So he will only ever sell the fields if he really needs the money.

Our second land speculator bought some fields nearby, financed with a large mortgage which makes the exercise cash negative. He will be keen to get planning as soon as possible, bank the uplift and pay of the mortgage and interest years. If he leaves it too long, the compound interest will wipe out any gain.

They are both getting the same benefits from owning those fields (steadily increasing likelihood of banking a nice fat planning gain); one has a notional cost and the other a real cost.

So with a real cash cost, land is being used more efficiently, the mortgaged fields are sold and developed, bricklayers get jobs and people can live there.

With LVT in place

LVT doesn't just turn a notional cost into a cash cost, focusing people's attention on optimising land use short term, it would, if handled correctly, keep land/housing selling prices very low and stable, thus discouraging people from hanging on as long as possible.

The heirs of the Poor Widow In A Mansion from the first example can't console themselves with the fact that the longer she remains there, the more they can sell the house for in future. If she really wants to 'pass on her hard earned wealth to her loved ones', she will trade down. If she doesn't care and prefers living there, she rolls up the LVT and her heirs can whistle for it.

Our lucky landowner from the second example will not be sitting back, waiting until he can realise a tasty windfall gain. His fields will never be worth more than a few thousand pounds per acre; when the council lifts planning restrictions, the higher LVT will cancel out most or all of the planning uplift. There will be no incentive to keep his fields out of use as long as possible and he will be sell it on to an actual builder or develop it himself ASAP.